First Data 2010 Annual Report Download - page 58

Table of Contents
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The Company tests contract and conversion costs greater than $1 million for recoverability on an annual basis by comparing the remaining expected
undiscounted cash flows under the contract to the net book value. Any assets that are determined to be unrecoverable are written down to the extent of their
recoverability. This analysis requires significant assumptions regarding the future profitability of the customer contract during its remaining term.
Additionally, contracts, conversion costs and all other long lived assets (including customer relationships) are tested for impairment upon an indicator of
potential impairment. Such indicators include, but are not limited to: a current period operating or cash flow loss associated with the use of an asset or asset
group, combined with a history of such losses and/or a forecast anticipating continued losses; a significant adverse change in the business, legal climate,
market price of an asset or manner in which an asset is being used; an accumulation of costs for a project significantly in excess of the amount originally
expected; or an expectation that an asset will be sold or otherwise disposed of at a loss.
In 2010, the Company recorded impairment charges totaling $11.5 million related to software, the write-off of assets the Company determined have no
future use or value, and other intangibles. In 2009, the Company recorded impairment charges totaling $168 million related to customer contracts, software,
real property, other intangibles, and trade name impairment charges. In 2008, the Company recorded impairment charges totaling $23.0 million related to an
asset impairment associated with the Company's subsidiary, Peace, due to the deterioration of profitability on existing business and Peace's limited success in
attracting new clients. The Company sold Peace in October of 2008. Refer to "Results of Operations – Other operating expenses, net" above for additional
information regarding these impairments. The Company followed a discounted cash flow approach in estimating the fair value of the reporting units,
intangible assets or other affected asset groups discussed above. Discount rates were determined on a market participant basis. In certain situations, the
Company relied in part on a third-party valuation firm in determining the appropriate discount rates. The Company obtained an appraisal from a third-party
brokerage firm to assist in estimating the value of real property in 2009. All key assumptions and valuations were determined by and are the responsibility of
management. A relatively small change in these inputs would have had an immaterial impact on the impairments.
Goodwill. The Company's goodwill balance was $17.3 billion and $17.5 billion as of December 31, 2010 and 2009, respectively. Goodwill represents
the excess of cost over the fair value of net assets acquired, including identifiable intangible assets, and has been allocated to reporting units. The Company's
reporting units are businesses at the operating segment level or one level below the operating segment level for which discrete financial information is
prepared and regularly reviewed by management.
The Company tests goodwill annually for impairment, as well as upon an indicator of impairment, using a fair value approach at the reporting unit
level. In step one of the impairment test, the Company estimates the fair value of each reporting unit using a discounted cash flow analysis. The Company
believes that this methodology provides the Company with a reasonable estimate of each reporting unit's fair value. The estimate of fair value requires various
assumptions about a reporting unit's future financial results and cost of capital. The Company determines the cost of capital for each reporting unit giving
consideration to a number of factors including the discount rate used by the third-party valuation firm in their calculations of the fair value of Holdings
common stock. All key assumptions and valuations are determined by and are the responsibility of management. If it is determined that the fair value of the
reporting unit is less than its carrying value, the Company proceeds to step two of the impairment test which requires the Company to estimate the fair value
of all of the reporting unit's assets and liabilities and calculate an implied fair value of goodwill, which is the difference between the reporting unit's fair value
and the fair value of all its other assets and liabilities. If the implied fair value of goodwill is less than its carrying value, the shortfall is recognized as an
impairment. The methodology for estimating fair value in step two varies by asset; however, the most significant assets are intangible assets. The Company
estimates the fair value of the intangible assets using the excess earnings method, royalty savings method, or cost savings method, all of which are a form of a
discounted cash flow analysis. An impairment charge of a reporting unit's goodwill could have a material adverse effect on the Company's financial results.
Changes in the underlying business and economic conditions could affect these estimates used in the analysis discussed above, which in turn could affect the
fair value of the reporting unit. Thus, it is possible for reporting units that record impairments to record additional impairments in the future.
The Company did not record any goodwill impairment charges in 2010. As of October 1, 2010, the most recent impairment analysis date, the fair value
of each reporting unit substantially exceeded its carrying value with one exception. The fair value of the International reporting unit, the only reporting unit
within the International segment, exceeded its carrying value by 7%. As of October 1, 2010 and December 31, 2010, this reporting unit had goodwill balances
of $2,307.5 million and $2,281.5 million, respectively.
In the fourth quarter of 2009, the Company recorded a $17 million goodwill impairment charge related to the Information Services reporting unit. The
Company followed a discounted cash flow approach in estimating the fair value of the reporting units and intangible assets. The significant factor that drove
most of the 2009 impairment was lower projections of financial results as compared to those used in the 2008 impairment testing. Discount rates were
determined on a market participant basis. The Company relied in part on a third-party valuation firm in determining the appropriate discount rates. All key
assumptions and valuations were determined by and are the responsibility of management. A small change in these inputs could have had a material impact on
the impairment as demonstrated below in discussing the 2008 impairment.
57